Pepsi & Microsoft, Top Picks for a Top Fund

Today’s confirmation bias for our positions in Pepsi (PEP) and Microsoft (MSFT) comes via Barron’s and their interview with Eric Schoenstein, portfolio manager for the Jensen Quality Growth Fund (JENSX).

PepsiCo: The fund doesn’t pick sides when it comes to Pepsi versus Coca-Cola ( KO ) at least not when it comes to the companies’ stocks. “There’s room in the fund for both,” says Schoenstein, though PepsiCo, a top holding, offers more upside. While Coca-Cola dominates on the beverage front, PepsiCo has snacks, with a 40% global market share or 10 times bigger than its next largest competitor, he says. The company’s 22 iconic brands, including Quaker Oats, Gatorade and Doritos, generate more than $1 billion in sales per year. PepsiCo has also paid a dividend for 44 consecutive years and had an average ROE of 35% over the past five years. In fact, last year PepsiCo’s ROE reached a 15-year high of 49. Consensus estimates peg 2016 earnings per share at $4.76 or just 4% higher than last year, but is expected to rise 8% to $5.16 by 2017. At a recent $109.53, shares trade at 21.2 times 2017 earnings, not far below their decade high of 22 times. Shares yield 2.7%.

Microsoft: It has long been considered an out-of-touch consumer technology company, but Schoenstein sees a mature software business with promise. When Steve Ballmer stepped down as CEO early 2014 and Satya Nadella took the helm, Microsoft started to get more credit, he says. Its Windows 10 operating system holds promise and its cloud service Azure is growing faster than Amazon’s offering. Late Tuesday, Microsoft announced better-than-expected quarterly results, helped by Azure sales that soared 102%. In Microsoft’s most recent annual report, return on equity dipped below 15%. But based on Schoenstein’s calculations, using recurring operational ROE, which excludes one-time write-downs related to Nokia, Microsoft clears its hurdle. Analysts expect earnings per share to rise 6% by the end of its fiscal year ended June 2017. Like PepsiCo, Microsoft’s valuation may give pause. At about $54, shares trade at 19 times 2017 earnings estimates, a notch below its 10-year high of 20. Its dividend yield is 2.7%.

Follow the link below for Eric’s other top three picks.

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Today’s Top 5 Stock Picks: Fund Beating 99% of Peers (Barron’s)

Pay Attention to Your Yield on Cost

From Barron’s.

But what matters to long-term investors is the yield based on what you paid for the stock, says Melcher. If the stock appreciates, the current yield may fall – even as the company increases the dividend. But what you’ll actually get paid from your investment will increase handsomely.

That’s why Melcher suggests keeping track of the yield based on your cost basis. Going back to the Apple example, Melcher says his firm purchased Apple stock for a client in 2006, which has gone up more than 1,100% since then. For that client, the yield on the cost basis is 20%.

The article went on to point out a couple of other good examples of yield on cost.

Home Depot (HD) has a current yield of 2.1%, but for someone who bought seven years ago, the yield on cost is 12%.

Altria (MO) has a current yield of 3.6%, but for someone who bought it 13 years ago, the yield on cost is 24%.

I went back and looked at the first handful stocks that we bought and still own for our Dividend Growth Strategy. This only goes back to 2011 but it is worthwhile to see what is our yield on cost for these 5 positions. The 5 companies I found are General Electric (GE), JP Morgan Chase (JPM), Microsoft (MSFT), Pfizer (PFE), and ExxonMobil (XOM).

General Electric (GE) cost basis is $15.07 and today’s yield on cost is 6.10%. GE yielded 3.85% based on TTM dividends when we first bought it.

JP Morgan Chase (JPM) cost basis is $32.04 and today’s yield on cost is 5.49%. JP Morgan yielded 2.5% based on TTM dividends when we first bought it.

Microsoft (MSFT) cost basis is $25.70 and today’s yield on cost is 5.6%. Microsoft yielded 2.49% based on TTM dividends when we fist bought it.

Pfizer (PFE) cost basis is $18.21 and today’s yield on cost is 6.59%. Pfizer yielded 4.4% based on TTM dividends when we first bought it.

ExxonMobil (XOM) cost basis is $70.92 and today’s yield on cost is 4.12%. ExxonMobil yielded 2.57% based on TTM dividends when we first bought it.

Obviously this yield on cost only applies to the accounts that were in our Dividend Growth Strategy from the start in September 2011. Accounts opened later will have much different cost basis for each position and different yields on cost.

JP Morgan’s dividend growth since we first bought it was helped by the fact that the Federal Reserve just started allowing them and other Banks to increase their capital returns to shareholders. One of the TTM (trailing twelve month) dividend payouts was a remnant of the Federal Reserve constrained dividends payout rules for banks.

Even over the short-time period of 4 years, the yield on cost exercise does show the power of not overpaying for a good business combined with strong dividend growth to build a rising income stream.

The Dividend Stocks of the Ultimate Stock Pickers

Morningstar is out with their lists of the highest-yielding and widely-held dividend paying stocks of their Ultimate Stock Pickers.

The top ten highest yielding owned by Morningstar’s Ultimate Stock Pickers.

Table courtesy of Morningstar. Click image to enlarge.
Table courtesy of Morningstar. Click image to enlarge.

And the most widely held dividend paying stocks by Morningstar’s Ultimate Stock Pickers.

Table courtesy of Morningstar. Click image to enlarge.
Table courtesy of Morningstar. Click image to enlarge.

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4 Dividend-Payers From the Ultimate Stock-Pickers (Morningstar)

Microsoft to Raise its Dividend in September?

Evercore met with Microsoft’s (MSFT) investor relations and highighted their key takeaways from the meeting in Barron’s. Number 4 is something we’re always interested in.

4) Even though the investor-relations team could not directly speak to any future changes to the current capital-return policy, we would not be surprised if Microsoft raises its dividend in September by 10%-20%, which is in line with previous dividend increases and the management team remains committed to a balanced capital-return. [emphasis added]

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Microsoft Could Raise Dividend in September (Barron’s)